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Photo by COSTAR GROUP
The Albert Kahn Building is one of several prominent buildings in the region in mortgage default.

The Fisher and Albert Kahn buildings in Detroit's New Center area could get new owners, or its current owner could work out a deal to maintain ownership of the iconic buildings.

The properties are among the ranks of high-profile office buildings in the region in mortgage default.

The driver? The economics of office rental rates and real estate carrying costs.

According to commercial mortgage-backed securities data from Bloomberg LP, entities of FK Acquisition LLC are in default on the $27 million mortgage on the New Center buildings. The registered agent for FK Acquisition is Southfield-based Farbman Group CEO Andy Farbman; Farbman Group handles property management and leasing.

Negotiations with Farbman and the foreclosure process will continue until a resolution is reached, according to notations on the loan reported by Bloomberg earlier this month.

A letter of default was first sent in November 2012. The 2005 loan matures in July 2015.

In December 2011, the $24.6 million balance on the 2005 Goldman Sachs Group Inc. loan was transferred to Miami Beach, Fla.-based special servicer LNR Partners Inc.

A representative for Farbman Group said company President Andy Gutman would not be made available for an interview. She sent the following statement from Gutman:

"We continue to be the proud operators of these great buildings in the heart of the city of Detroit. We are focused on continuing to do our part to build positive momentum in Detroit, specifically the New Center and Midtown areas."

A.J. Weiner, executive vice president in the Detroit office of Jones Lang LaSalle, called the default "unfortunately, a natural course of commercial real estate in this region."

FK is not in a unique position by defaulting on its loan in the Detroit market, where the default rates are significantly higher than national averages, according to New York City-based loan data service Trepp LLC.

In March, there was a 12.68 percent default rate in the metro Detroit market on $5.44 billion of outstanding commercial mortgage-backed securities debt, according to Trepp. The national average was 6.54 percent.

In March 2013, there was a 15.3 percent default rate on $5.99 billion of debt in the Detroit market. The national average was 9.5 percent, according to Trepp.

Other landmark metro Detroit buildings have also faced default.

New York City-based 601W Cos. confirmed it planned to buy the 2.2 million-square-foot Southfield Town Center out of foreclosure for $177.5 million after Blackstone Group LP, its New York City-based owner, defaulted on a $235 million mortgage, owing $138 million. That sale is expected to close in early May.

Nemer Property Group, owner of the 1 million-square-foot Galleria Officentre in Southfield off Northwestern Highway west of Telegraph Road, owes more than $84 million on its original $89.6 million GE Capital mortgage for the four-building complex, for which it purchased majority rights in 2007, according to Bloomberg. The value of the property dropped from $112 million in October 2006 to $47 million as of July 2012. A loan modification is in process by loan servicer LNR.

"It touches all types of buildings and, as iconic as the Fisher and Kahn are, that's the story. I'm sure Farbman did as much as they could with them," Weiner said.

Matt Farrell, executive principal/partner of Bingham Farms-based CorePartners Associates LLC, said the 2005 loan was originated "in a different marketplace, when times were better."

Rents at the Fisher and Kahn buildings "were then and still are today above the perceived market rates."

Photo by COSTAR GROUP
The Fisher Building is among several high-profile buildings in the region in mortgage default.

At the 86-year-old Fisher, rent is $16 per square foot, according to Washington, D.C.-based real estate information service CoStar Group Inc. At the 83-year-old Kahn building, it is $17 per square foot.

"With the debt-carry and operating expenses, it makes mathematical sense" for FK to reposition the buildings, Farrell said.

"It's not inconceivable that (ownership) changes but some of the existing players on the table remain in the project at the end of the day," he said. "It's also not inconceivable that the lender uses this as a strategy to get an evaluation of the property and still get a settlement with the current borrower."

Weiner said New Center has not yet had the dramatic office market improvement that has touched Detroit's central business district.

LNR Properties declined comment.

Farmington Hills-based Friedman Integrated Real Estate Solutions LLC has toured the two buildings, according to real estate sources. FK bought the New Center buildings, north of West Grand Boulevard between M-10 (The Lodge Freeway) and Woodward Avenue, in 2001 from TrizecHahn Corp. for $31 million ($33.51 per square foot).

FK inked a deal in 2002 to sell five floors (133,000 square feet) of office condo space and about 7,000 square feet of concourse space in the Fisher Building to Detroit Public Schools for $24.1 million along with $17 million in build-out construction to be performed by Huntington Construction Co., a division of the Farbman Group.

A real estate source said DPS is not affected by the default or a possible sale.

That deal came under criticism from former DPS Emergency Financial Manager Robert Bobb. Steve Wasko, assistant superintendent of community relations, did not return calls last week.